Great restaurant. Order the Scallops and the off menu desert.
<a href="http://www.urbanspoon.com/r/3/1675697/restaurant/Soho/Principessa-New-York"><img alt="Principessa on Urbanspoon" src="http://www.urbanspoon.com/b/link/1675697/biglink.gif" style="border:none;padding:0px;width:200px;height:146px" /></a>
Friday, June 8, 2012
Thursday, September 29, 2011
Janis Joplin on Freedom and the Euro Crisis
The Greeks most likely will disagree with Janis Joplin's famous song Me and Bobby McGee in which she proclaims "freedom is just another word for nothing left to lose..."
If you are Greek you may have nothing left to lose, but you are certainly not free from having to pay for the excessive borrowing of the past. The Greek Government has passed widespread austerity measures to appease the European Central Bank and insure the funding of $11 billion in aid needed to cover the cost of running the country through the month of October. The austerity measures consisting of tax increases and wage freezes are crippling the middle class and ruining any chance for economic growth.
Total Greek public debt is about 370 billion euros, or $500 billion. When compared to Argentina’s debt of $82 billion when it defaulted in 2001 the Greek debt problem appears massive. The size of the Greek crisis is on par with the Lehman Brothers bankruptcy which had approximately $600 billion in assets at the time of its collapse.
If you are Greek you may have nothing left to lose, but you are certainly not free from having to pay for the excessive borrowing of the past. The Greek Government has passed widespread austerity measures to appease the European Central Bank and insure the funding of $11 billion in aid needed to cover the cost of running the country through the month of October. The austerity measures consisting of tax increases and wage freezes are crippling the middle class and ruining any chance for economic growth.
Total Greek public debt is about 370 billion euros, or $500 billion. When compared to Argentina’s debt of $82 billion when it defaulted in 2001 the Greek debt problem appears massive. The size of the Greek crisis is on par with the Lehman Brothers bankruptcy which had approximately $600 billion in assets at the time of its collapse.
Much like the Lehman Brothers bankruptcy the real consequence of a default which threatens the World economy is the fear of economic contagion and a crisis of confidence. The Eurozone's inability to calm the market uncertainty of the Greek situation has threatened the entire European Union and its current financial standing.
The European Union's uncertain course of action has caused a run on European sovereigns and banks as trading counter-parties try and protect against losses and hedge funds seek to make billions by purchasing Credit Default Swaps (CDS) and shorting stocks, bonds and currencies.
A recent Merrill Lynch report on the subject stated:
“We believe losses could be substantially larger through deleveraging and second-round effects, contagion from failure of individual banks from or outside the periphery, exposures of the nonbank financial sector.”
Most Greek debt is currently trading around 40 cents on the dollar whereas on average most banks and other holders of Greek debt have only written down their positions by only 21%. The good news is that some of the shortfall for the banks may be mitigated by their CDS positions which will cover up some of the additional losses.
It is difficult to quantify and track the level of CDS positions which may be cushioning some of the shortfall in loss provisioning since these derivative contracts are made off market and unregulated to a certain extent. However, the overall market is gigantic. The aggregate volume of CDS on global sovereign debt was $2.83 trillion as of Sept. 16, according to the Depository Trust & Clearing Corp.
The effects of contagion are already being seen. In particular, French banks have been attacked due to their exposure to Greek debt. However, the fact of the matter is that even if Greece were to default it would only result in a minimal impact on French banks' tier one capital ratios. Furthermore, Germany's banks have a much higher position in Greek bonds according to the EU's stress test report showing an exposure to Greek debt equivalent to 12% of tier 1 capital - still a defendable level.
The current rescue package simply isn't enough to save Greece which has too much of a debt load at 186% of GDP ($54,000 per Greek). The austerity measures are making it even more difficult for the economy to recover. Any additional recovery measures would simply be throwing good money after bad as the Greek's have no ability to repay the mounting debt. Many have argued that Greece should default paying 40-50 cents on the dollar - a level which will allow Greece to recover without crippling the European banking industry.
The market has responded drastically. Euro-area bank credit default swap spreads have doubled to about 300 basis points, and European bank stocks have plunged nearly 30 percent since early August.
Government officials and advisors have used buzz words such as "ring fence" and "firewall" to describe the necessary measures required to contain the Greek bond run from spreading through the entire Eurozone.
Potential solutions include ways to strengthen their 440 billion euro European Financial Stability Fund (EFSF), possibly leveraging it to the tune of 1-2 trillion euros. Germany, Europe's largest economy, has been against such methods as it would threaten the fund's AAA credit rating and break various rules set forth in the governing documents of the European Union.
Why continue to bailout Greece when the banks and sovereign nations have enough wherewithal to withstand a Greek default? The answer is the fear of the knock on effects to other over levered countries that may pose a more serious threat to the European Union.
The only solution is to act quickly before market forces become too great to counteract with policy measures. In order to act quickly, European nations would need to avoid political confrontations and a wholesale re-writing of the European Union's constitution.
The European Union's uncertain course of action has caused a run on European sovereigns and banks as trading counter-parties try and protect against losses and hedge funds seek to make billions by purchasing Credit Default Swaps (CDS) and shorting stocks, bonds and currencies.
A recent Merrill Lynch report on the subject stated:
“We believe losses could be substantially larger through deleveraging and second-round effects, contagion from failure of individual banks from or outside the periphery, exposures of the nonbank financial sector.”
Most Greek debt is currently trading around 40 cents on the dollar whereas on average most banks and other holders of Greek debt have only written down their positions by only 21%. The good news is that some of the shortfall for the banks may be mitigated by their CDS positions which will cover up some of the additional losses.
It is difficult to quantify and track the level of CDS positions which may be cushioning some of the shortfall in loss provisioning since these derivative contracts are made off market and unregulated to a certain extent. However, the overall market is gigantic. The aggregate volume of CDS on global sovereign debt was $2.83 trillion as of Sept. 16, according to the Depository Trust & Clearing Corp.
The effects of contagion are already being seen. In particular, French banks have been attacked due to their exposure to Greek debt. However, the fact of the matter is that even if Greece were to default it would only result in a minimal impact on French banks' tier one capital ratios. Furthermore, Germany's banks have a much higher position in Greek bonds according to the EU's stress test report showing an exposure to Greek debt equivalent to 12% of tier 1 capital - still a defendable level.
The current rescue package simply isn't enough to save Greece which has too much of a debt load at 186% of GDP ($54,000 per Greek). The austerity measures are making it even more difficult for the economy to recover. Any additional recovery measures would simply be throwing good money after bad as the Greek's have no ability to repay the mounting debt. Many have argued that Greece should default paying 40-50 cents on the dollar - a level which will allow Greece to recover without crippling the European banking industry.
The market has responded drastically. Euro-area bank credit default swap spreads have doubled to about 300 basis points, and European bank stocks have plunged nearly 30 percent since early August.
Government officials and advisors have used buzz words such as "ring fence" and "firewall" to describe the necessary measures required to contain the Greek bond run from spreading through the entire Eurozone.
Potential solutions include ways to strengthen their 440 billion euro European Financial Stability Fund (EFSF), possibly leveraging it to the tune of 1-2 trillion euros. Germany, Europe's largest economy, has been against such methods as it would threaten the fund's AAA credit rating and break various rules set forth in the governing documents of the European Union.
Why continue to bailout Greece when the banks and sovereign nations have enough wherewithal to withstand a Greek default? The answer is the fear of the knock on effects to other over levered countries that may pose a more serious threat to the European Union.
The only solution is to act quickly before market forces become too great to counteract with policy measures. In order to act quickly, European nations would need to avoid political confrontations and a wholesale re-writing of the European Union's constitution.
Fears that the EFSF is not adequate enough to deal with the crisis are well founded, but efforts to lever the fund or to use complicated financial engineering (i.e. the SPV structure) will not be easily agreed amongst member states. Attempts to chase these solutions may cause further delay and irreparable damage to the financial system.
Banking institutions are some of the most levered vehicles in the World and are specifically designed to allocate capital. Why try to recreate the fractional reserve banking model when it already exists?
U.S. and European banks have raised roughly $100 billion in extra equity capital this year, according to Institute of International Finance calculations, however, this is not enough to quill market fears of bank liquidity. Moreover, bank lending rates are still muted. Capital ratios need to be increased to not only prove that the banks are solvent, but more importantly that they are liquid enough to sustain market pressures.
Healthy banks would be able to withstand the necessary sovereign defaults while also having the capability to buy future sovereign debt offerings. The central banks can support these measures by providing cheap financing to the banks to incentivize the continued funding of sovereign debt.
There would still be political hurdles to overcome. The biggest banks are generally located in the most powerful European countries. Bailouts of these institutions will be looked upon more favorably within these countries then the perspective bailout of a foreign nation. Why should the German's pay for the excesses of Greece? The bailout of sovereign institutions would mitigate against this type of questioning.
George Soros laid out a plan along these lines in a recent issue of the Financial Times. There may be a good reason why he has been moving up the World's richest people list.
George Soros - How to Avoid Another Depression
Banking institutions are some of the most levered vehicles in the World and are specifically designed to allocate capital. Why try to recreate the fractional reserve banking model when it already exists?
U.S. and European banks have raised roughly $100 billion in extra equity capital this year, according to Institute of International Finance calculations, however, this is not enough to quill market fears of bank liquidity. Moreover, bank lending rates are still muted. Capital ratios need to be increased to not only prove that the banks are solvent, but more importantly that they are liquid enough to sustain market pressures.
Healthy banks would be able to withstand the necessary sovereign defaults while also having the capability to buy future sovereign debt offerings. The central banks can support these measures by providing cheap financing to the banks to incentivize the continued funding of sovereign debt.
There would still be political hurdles to overcome. The biggest banks are generally located in the most powerful European countries. Bailouts of these institutions will be looked upon more favorably within these countries then the perspective bailout of a foreign nation. Why should the German's pay for the excesses of Greece? The bailout of sovereign institutions would mitigate against this type of questioning.
George Soros laid out a plan along these lines in a recent issue of the Financial Times. There may be a good reason why he has been moving up the World's richest people list.
George Soros - How to Avoid Another Depression
Friday, September 23, 2011
Go Lunks
Planet Fitness has an interesting business model. It actively excludes serious weight lifters from its gyms.
You might think this is crazy, however, since gyms charge monthly memberships rather than a pay for use model it all makes perfect sense. Planet Fitness has figured out how to increase the maximum amount of its memberships by targeting people who are less likely to ever use their gyms. The result, plenty of monthly membership dues flowing to the bottom line and uncrowded gyms.
Planet Fitness prides itself on providing a judgement free zone even though it goes out of its way to profile against "lunks". That's right, Planet Fitness has created a new word to describe people who have a "hard-core, look-at-me attitude". Their gyms are even equipped with "Lunk™ Alarms".
Now lets look at the numbers. In January 2010, one franchise in Irondequoit, NY sold 4,795 memberships in one month. The Irondequoit club offers two membership options. Option 1 does not charge a startup fee with membership only $19.99 per month. Alternatively, Option B charges a $29 start up fee and a monthly fee of only $15.00 per month.
Annual membership revenue for the average Planet Fitness is $1.7 million versus an industry average of $1.2 million. At $15 per month the average Planet Fitness member pays $180 per year for their membership which means the average club has approximately 8,000 members.
The largest club in the Planet Fitness empire of 42 corporate locations measures 20,000 square feet implying that if every club was 20,000 square feet and the average membership roster was 9,000 members than each member would only have 2.5 square feet of workout space versus general fire marshall maximum occupancy requirements restricted to 36 square feet per person.
This sounds like a ponzi scheme to me. Go lunks!
Beauty Pageants
Since when did serious presidential debates turn into self promoting beauty pageants for biased news agencies:
The candidates don't even have name plates, but CNN and Fox have hundreds of logos tattooed everywhere.
Fenced In The Palin Era
Sen. Joh McCain's nomination of Alaska Gov. Sarah Palin as his vice presidential candidate in 2008 marked the end of serious politicians in Washington. McCain, one of the longest standing politicians, exclaimed that Palin would help him shake up the "me first and country second" politics in Washington. However, McCain's complete lapse in competent judgement caused him to bring a quack within a heartbeat of the presidency.
What's most bothersome is that Washington politicians including the President have thrown away common sense and replaced it with decisions driven by a plethora of modern political advisors who have their heads stuck in never ending Gallup polls and econometric computer analysis of meaningless datapoints. Decisions are now based on complex models and focus groups causing politicians to lose sight of reality. Playing Moneyball with politics just doesn't work.
Populist histeria has driven every major campaign and political decision since the end of serious politics in the Palin Era. Now careless presidential candidates base decisions on hearsay (read Michelle Bachmann's suggestion that an HPV vaccine causes mental retardation). Case and point is that politicians have become so self involved that at a recent Republican presidential debate not one candidate stood up for an active soldier who was booed by an ignorant audience for questioning DADT policy. To think these candidates spend millions of dollars trying to pander to this same crowd of "voters".
What's more worrisome is the increasingly isolationist tone resonating from the candidates. Michelle Bachmann was once again at the forefront claiming that she would put a stop on the recent charter flights between Florida and Cuba because, quite plainly, Cuba is listed (since March 1982) as a State Sponsor of Terrorism by www. state.gov.
It goes deeper. The candidates went on further to support the construction of a Berlin Wall-like fence along the entire national border with Mexico (a member of NAFTA).
Surprisingly enough Congressman Ron Paul spoke up against the fence warning that we should be more concerned with Americans leaving the US than illegal aliens moving in to the US.
Rightly so its interesting to note that Warren Buffet's wealth declined by $6 billion in 2011 as Mexico's Carlos Slim secured his place as the World's richest man. China doubled its number of billionaires while Moscow now has more billionaires than any other city.
American's need to wake up to the fact that our position at the top is in immediate danger. Unscrupulous consumption and disregard for personal fiscal responsibility threatens this nation at its core.
What's most disturbing is that hedge fund managers took up 27 spots of the 400 richest Americans with George Soros making it into the Top 10 for the first time. Hedge fund managers are replacing entrepreneurs (the engineers of American innovation) as America's richest class.
What's most bothersome is that Washington politicians including the President have thrown away common sense and replaced it with decisions driven by a plethora of modern political advisors who have their heads stuck in never ending Gallup polls and econometric computer analysis of meaningless datapoints. Decisions are now based on complex models and focus groups causing politicians to lose sight of reality. Playing Moneyball with politics just doesn't work.
Populist histeria has driven every major campaign and political decision since the end of serious politics in the Palin Era. Now careless presidential candidates base decisions on hearsay (read Michelle Bachmann's suggestion that an HPV vaccine causes mental retardation). Case and point is that politicians have become so self involved that at a recent Republican presidential debate not one candidate stood up for an active soldier who was booed by an ignorant audience for questioning DADT policy. To think these candidates spend millions of dollars trying to pander to this same crowd of "voters".
What's more worrisome is the increasingly isolationist tone resonating from the candidates. Michelle Bachmann was once again at the forefront claiming that she would put a stop on the recent charter flights between Florida and Cuba because, quite plainly, Cuba is listed (since March 1982) as a State Sponsor of Terrorism by www. state.gov.
It goes deeper. The candidates went on further to support the construction of a Berlin Wall-like fence along the entire national border with Mexico (a member of NAFTA).
Surprisingly enough Congressman Ron Paul spoke up against the fence warning that we should be more concerned with Americans leaving the US than illegal aliens moving in to the US.
Rightly so its interesting to note that Warren Buffet's wealth declined by $6 billion in 2011 as Mexico's Carlos Slim secured his place as the World's richest man. China doubled its number of billionaires while Moscow now has more billionaires than any other city.
American's need to wake up to the fact that our position at the top is in immediate danger. Unscrupulous consumption and disregard for personal fiscal responsibility threatens this nation at its core.
What's most disturbing is that hedge fund managers took up 27 spots of the 400 richest Americans with George Soros making it into the Top 10 for the first time. Hedge fund managers are replacing entrepreneurs (the engineers of American innovation) as America's richest class.
Wednesday, September 21, 2011
Blame the Bankers... Not so fast
Many feel that Wall Street bankers are to blame for the current economic woes faced around the globe. Wall Street bankers in pursuit of never ending greed enabled the excessive growth of credit and promoted the shadow banking industry to over lever America. They peddled reckless mortgage loans via complex derivative securities to naive buyers across the World who relied on the Rating Agency's flawed credit ratings. Recognizing this, bankers and hedge funds took short positions in these securities that were designed to result in windfall profits from their inevitable failure. The IBGYBG (I'll Be Gone You'll Be Gone) mentality led to the destruction of many institutions including Lehman Brothers.
But, is it really the bankers fault? It is interesting to note that Alan Greenspan lowered the fed funds rate from 6.5% to 1% over the last decade in order to correct a stock market bubble that in turn created a credit bubble as investors blindly sought higher yields. The loose monetary policy increased debt levels as a % of GDP to record levels and created the biggest bubble of all in the housing market causing an unprecedented redistribution of wealth enlarging the middle class without hurting the rich or the poor. That is until it made everyone worse off...
Ben Bernanke is now left with an economy that has an unemployment rate of 9.1% and an increasingly high CPI index (recent rates of change of 3.8% y/o/y and a core rate of 2%). There is no other place to turn to inflate another bubble to lift us out of the current economic depression. So what has the fed done, turned back to the housing market for support with Operation Twist - an effort to decrease long term rates at the expense of short term rates thereby lowering mortgage costs for new buyers and providing further opportunity for existing home owners to refinance at a lower rate.
The problem is that increasing short term rates will hurt the banking industry which profits by borrowing cheap short term debt to fund long term lending. Banks will continue to demand more equity from home owners to pad capital ratios, offsetting the economic impact of lower interest rates.
Source: Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields, from Irrational Exuberance, 2d ed.
It is clear that the fed created an environment to support the creation of an asset bubble in the American housing market. It's also interesting to note that almost half of the $14.7 trillion US federal government debt is held by the Federal Reserve and the government itself according to an IMF report. The Big Picture reports a further 22 percent of debt is held by foreigners (mainly central banks) which when combined with the federal government share of US debt results in almost 70 percent of US government debt being held by non-market/non-profit oriented investors.
This unfortunately may mean that we will see elected officials continue to cloud the real issues with meaningless political finger pointing as they continue to kick the can down the road.
Trade deficits and imbalances faced amongst sovereigns will result in more gold purchases by central banks as they seek to protect against a run on their currencies. This problem will intensify if the availability of dollars declines. No wonder gold is at an all time high.
If you want to hear more about trade deficits read what Warren Buffet has to say:
Warren Buffet on Trade
But, is it really the bankers fault? It is interesting to note that Alan Greenspan lowered the fed funds rate from 6.5% to 1% over the last decade in order to correct a stock market bubble that in turn created a credit bubble as investors blindly sought higher yields. The loose monetary policy increased debt levels as a % of GDP to record levels and created the biggest bubble of all in the housing market causing an unprecedented redistribution of wealth enlarging the middle class without hurting the rich or the poor. That is until it made everyone worse off...
Ben Bernanke is now left with an economy that has an unemployment rate of 9.1% and an increasingly high CPI index (recent rates of change of 3.8% y/o/y and a core rate of 2%). There is no other place to turn to inflate another bubble to lift us out of the current economic depression. So what has the fed done, turned back to the housing market for support with Operation Twist - an effort to decrease long term rates at the expense of short term rates thereby lowering mortgage costs for new buyers and providing further opportunity for existing home owners to refinance at a lower rate.
The problem is that increasing short term rates will hurt the banking industry which profits by borrowing cheap short term debt to fund long term lending. Banks will continue to demand more equity from home owners to pad capital ratios, offsetting the economic impact of lower interest rates.
Source: Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields, from Irrational Exuberance, 2d ed.
It is clear that the fed created an environment to support the creation of an asset bubble in the American housing market. It's also interesting to note that almost half of the $14.7 trillion US federal government debt is held by the Federal Reserve and the government itself according to an IMF report. The Big Picture reports a further 22 percent of debt is held by foreigners (mainly central banks) which when combined with the federal government share of US debt results in almost 70 percent of US government debt being held by non-market/non-profit oriented investors.
This unfortunately may mean that we will see elected officials continue to cloud the real issues with meaningless political finger pointing as they continue to kick the can down the road.
Trade deficits and imbalances faced amongst sovereigns will result in more gold purchases by central banks as they seek to protect against a run on their currencies. This problem will intensify if the availability of dollars declines. No wonder gold is at an all time high.
If you want to hear more about trade deficits read what Warren Buffet has to say:
Warren Buffet on Trade
Tuesday, September 20, 2011
What is Economic Growth
Economic growth is defined as the increasing capacity of the economy to satisfy the wants of its members according to Wikipedia. Wikipedia goes on to state that lowered costs through increases in productivity increase demand for goods and services.
The US has almost always relied on consumer led growth to drive the economy. However, with household wealth declining and painful de-leveraging still needed its more likely that the US will have to look to other drivers of growth.
By now one would think that US consumers have all the goods they could possibly need or want. For instance, there were over 35 million flat screen televisions sold in 2009. By 2010 roughly 115 million households have televisions with 55% of total US households having more than 3 television sets. There are now more TVs per household on average than people per household.
Nielsen Report
So where should we look to for growth? Energy and energy conservation products seem like a good bet. A McKinsey report concludes the US economy has the potential to reduce annual non-transportation energy consumption by roughly 23 percent by 2020, eliminating more than $1.2 trillion in waste—well beyond the $520 billion upfront investment (not including program costs) that would be required.
Mckinsey
The US has almost always relied on consumer led growth to drive the economy. However, with household wealth declining and painful de-leveraging still needed its more likely that the US will have to look to other drivers of growth.
By now one would think that US consumers have all the goods they could possibly need or want. For instance, there were over 35 million flat screen televisions sold in 2009. By 2010 roughly 115 million households have televisions with 55% of total US households having more than 3 television sets. There are now more TVs per household on average than people per household.
Nielsen Report
So where should we look to for growth? Energy and energy conservation products seem like a good bet. A McKinsey report concludes the US economy has the potential to reduce annual non-transportation energy consumption by roughly 23 percent by 2020, eliminating more than $1.2 trillion in waste—well beyond the $520 billion upfront investment (not including program costs) that would be required.
Mckinsey
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